Yesterday, June 23, 2014, in Iskanian v. CLS Transportation of Los Angeles (Case No. S204032), the California Supreme Court finally put to rest the issue of whether the Federal Arbitration Act (FAA) preempted California state law that previously restricted enforcement of employee arbitration agreements. The Court also finally rejected the argument that the National Labor Relations Act (NLRA) invalidates employee arbitration agreements. While mostly favorable for employers, the California high court carved out an exception, holding that the California Private Attorneys General Act of 2004 (PAGA) (Lab. Code Sec. 2698 et seq.), also known as the "Bounty Hunter" statute, is not preempted by the FAA, allowing employees to pursue on behalf of the State of California penalty claims for violations of the Labor Code.
The arbitration agreement at issue contained a class action waiver, which read: "[E]xcept as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person."
In response to a 2006 lawsuit for the failure to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, or pay final wages in a timely manner, the employer moved to compel arbitration, which was granted. The employee then appealed. Before the Court of Appeal could rule, the California Supreme Court invalidated employment arbitration agreements under most circumstances in Gentry v. Sup. Ct., 42 Cal. 4th 443 (2007). This caused the Court of Appeal to issue a writ of mandate directing the Superior Court to reconsider its ruling in light of Gentry.
On remand, the employer then voluntarily withdrew its motion to compel arbitration, and the parties proceeded to litigate the case. This led to the filing of a first amended complaint, which included PAGA claims, wherein the employee sought to act as a representative of the State of California in seeking civil penalties for the alleged violations of the Labor Code.
The Demise of Gentry
The Supreme Court first considered the issue of class action waivers in light of the United States Supreme Court's ruling in AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), as well as several other arbitration-related rulings. In doing so, it found that the rule from Gentry does not survive Concepcion. Briefly, Gentry held that if individual arbitration or litigation cannot be designed to approximate the advantage of a class proceeding, then a class waiver is invalid. In other words, in cases where there are relatively small dollars at stake, certain wage and hour claims might not be prosecuted if a case was required to be individually arbitrated. But relying on Concepcion, the California Supreme Court explained that class action waivers are not invalid even if an individual proceeding would be an ineffective means to prosecute certain claims.
State Labor Commissioner -- Berman -- Hearings Can Be Waived
The Supreme Court also took the opportunity to address waivers of so-called "Berman hearings" – a special administrative hearing held before the State's Labor Commissioner office – concluding that a Berman hearing waiver is valid even if the unavailability of a Berman hearing would leave employees with ineffective means to pursue wage claims against their employers. Distinguishing Berman hearing waivers with class action waivers, the Supreme Court explained that, properly drafted, there is no reason that the protections afforded to claimants under the current Berman hearing administrative process "cannot be achieved by designing an arbitration process that is accessible, affordable, and consistent with fundamental attributes of arbitration."
D.R. Horton Is Rejected
The Court then turned to the NLRA and the Board's decision in D.R. Horton Inc. & Cuda, 357 NLRB No. 184 (2012). As some may recall, the argument by proponents of invalidating class action waivers, have argued that the NLRA generally prohibits contracts that compel employees to waive their right to participate in class proceedings to resolve wage claims. Substantially relying on the Fifth Circuit's rejection of the Board's rule, the California Supreme Court, citing American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013) (federal antitrust laws do not preclude enforcement of a class action waiver in an arbitration agreement), agreed with the United States Supreme Court in finding that "neither the NLRA's text nor its legislative history contains a congressional command prohibiting [class action] waivers." Even so, however, the Court left open the possibility that arbitration agreements could be subject to challenge under Section 8(a)(1) and (4) of the NLRA. However, those challenges, which were inapplicable in this case, are limited to, for example, situations where the arbitration agreement contains language that would lead employees to reasonably believe they were prohibited from filing an unfair labor practice charges with the Board. Specifically, the Court said: "[w]e have no occasion to decide whether an arbitration agreement that more broadly restricts collective activity would run afoul of Section 7." While the United States Supreme Court could eventually change things, until they do, D.R. Horton is essentially a dead issue in California.
Court Carves Out PAGA Claims – Bounty Hunter Statute Not Preempted
While clarifying that Gentry and D.R. Horton provide no obstacle to arbitrating wage and hour claims, and confirming that the employer-defendant had not engaged in any conduct sufficient to waive its rights to compel arbitration, the Court left unresolved what would occur when a PAGA claim is tethered with a Rule 23 class case. Contrary to the Rule 23 claims, the Court found that the FAA did not preempt PAGA claims. Under PAGA, the employee-plaintiff "acts as the proxy or agent of state labor law enforcement agencies, representing the same legal right and interest as those agencies" and seeking the same civil penalties "that otherwise would be sought by" those agenices. Amalgamated Transit Union, Local 1756, AFL-CIO v. Sup. Court, 46 Cal.4th 993, 1003 (2009). The Court reasoned that because PAGA claims are filed on behalf of the State and not individual employees, and because the State was not, and would not be, a party to the underlying arbitration agreement, a PAGA claims "lies" completely "outside of the FAA's coverage because it is not a dispute between an employer and an employee arising out of their contractural relationship." But, this reasoning caused Justice Chin to write, in a concurring opinion, that the majority had fashioned a rule for which it "offers no case law support." According to Justice Chin, the arbitration agreement in question in this case was violative of the FAA because it barred the plaintiff from asserting his statutory right under PAGA in any forum.
Procedural Compatability Of PAGA Claims When Coupled With Labor Code Wage-Related Claims Will Are Left Unanswered
Having concluded that employers cannot compel the waiver of employee's representative PAGA claims, the Court recognized the inherent procedural quandary its ruling puts the litigants to class actions in. Although saying it was "next consider[ing] how the parties will proceed" once back in the trial court, the Supreme Court did little other than to acknowledge that its opinion "raises a number of questions." Indeed, the Court explained that the open questions include whether (1) the parties may agree to a single forum for resolving the PAGA claim and the other claims, and (2) if not, then it might be appropriate to bifurcate the claims, within individual claims going to arbitration and the representative PAGA claims to litigation. However, the Court suggested it was not to be blamed for leaving open these fundamental procedural questions, as the parties had not addressed these questions on appeal. It thus directed them to do so on remand.
What does Iskanian mean to employers? While Gentry and the NLRA are no longer viable obstacles to compelling arbitration of wage claims in California, it is likely that the struggle between employees and employers will move to PAGA, with employees trying to figure out how best to leverage a PAGA claim, leaving employers and the court to figure out how to procedurally manage a case that has legs both in arbitration and Superior Court.